2008-06-12Staff Report 2 By Albertus Mutonga Matongela (Part 2) This is the second article in a series of articles on payment systems in Namibia. The present article looks at the importance of payment system/s in economic development. Happy reading. The importance of payment systems in economic development is well articulated in the payment system literature. Without payment systems it would be difficult to transfer value from a payer to a payee in an economy. In contemporary economies there are instruments that consumers of financial services use to transfer funds from one point to another. This is the opposite of the barter economy, which prevailed in ancient times in which money was not involved. It is probably worth mentioning that payment systems become important in the economy because of activities that take place in the product market. This implies that activities in the goods and services market trigger the flow of funds in the economy as the following diagram, which portrays the relationship between a payment system and sectors of the economy, shows: The relationship between a payment system and sectors of the economy Source: Own drawing Perturbed by a desire to satisfy a particular need a consumer buys a particular product at a specific merchant. Let us assume John again, who goes for dinner at a restaurant at Maerua Mall in Windhoek and pays for food using a debit card. In this transaction John is a payer and the merchant supplying food at Maerua Mall is a payee. In this example John instructs his banking institution to pay the merchant through the merchant's banking institution. The merchant receives funds later in the process after the debit card transaction has been approved by the payer's and payee's banking institutions. Holding other things the same were it not for a debit card the transaction would not have gone through. But with the availability of the debit card and other payment systems that transfer funds between accounts of banking institutions, it becomes possible for a merchant to receive funds from the payer after a day or two. The total economy is supported by consumer spending in the product market that is made possible by the availability of different payment mechanisms and processes. When the merchant receives funds from the payer the funds can be re-invested in the form of inventories or fixed investments and this supports economic growth of an economy. Consequently, the country develops at the backdrop of growth in the gross domestic product (GDP). Remember, gross domestic product in Namibia is driven mainly by consumer spending. Consumer spending constitutes around 60 percent of Namibia's GDP. Payment systems play an important role in international payments and monetary policy implementation. International payments and monetary policy affect the development of any economy. With respect to international payments consider international remittances, which involve the transfer of funds by migrant workers from places of work in a foreign country to their country of origin. For example, a Namibian working in the United Kingdom can send money to relatives at home in Namibia. The funds received from abroad can be used for various purposes including paying for children's school fees or employing a seasonal worker to tend a mahangu field. All these activities are paramount towards the realization of economic growth and social development in a recipient country, Namibia. It is mentioned above that payment systems are central in the conduct of monetary policy, which has a bearing on how the whole economy performs. Monetary policy actions in Namibia are intended to control prices. Monetary policy is implemented in a large value payment system - the real time gross settlement system (RTGS). RTGS is the system that is used to transfer payments between payment system participants at the Bank of Namibia and is used to implement the Bank rate that is announced by the Bank of Namibia at a certain point in time. The Bank rate is the rate at which banking institutions borrow funds from the Bank of Namibia. Changes in the Bank rate causes a change in prime lending rates that banking institutions use when lending funds to their customers. Inflation in Namibia is affected depending on the behavior of customers of banking institutions in the use of credit. If there is a jump in lending for residential purposes it implies that interest rates in the domestic economy are favourable and this in itself can bring about inflation. But as long as prices in the economy are low and stable, the effect on the aggregate economy is desirable. In the next article we will address different stakeholders in the National Payment System. 2008-06-12Staff Report 2
